How to navigate construction sector inflation

Inflation is running rampant in Europe’s construction sector, with both materials and energy soaring in price. Picking a path through this will be difficult. But those who manage it will emerge in a far stronger position.

Since the War in Ukraine began in February, rampant inflation has affected the construction sector in Europe where businesses were already struggling with price volatility caused by Covid-19-related supply chain disruption. In March alone, data from the Department for Business, Energy and Industrial Strategy (BEIS) suggests the cost of reinforcement and other commodities affected by the Ukraine crisis rose by over 30%.

New research from Arcadis highlights the trend of global inflation within the construction sector last year as construction markets across Europe and North America experienced double-digit cost increases during 2021 – and that the screw has tightened during the first half of this year with costs rising in many parts of the world.

The Ukraine conflict has now caused the price of both raw materials and energy to soar in Europe, warns the company, which provides sustainable design, engineering, and consultancy solutions for natural and built assets in more than 70 countries, improving quality of life for people around the world.

Picking a path through this unprecedented inflation spike will be difficult, particularly given that the outlook for the months and years ahead remains so uncertain. The difficulty of agreeing prices and contract terms that are acceptable to clients, contractors and project funders is already leading to delays. It is also challenging to make changes to live projects or those in procurement; discussions on how to share risk – and losses – often prove fraught.

Nevertheless, Simon Rawlinson, Arcadis’ Head of Strategic Research and Insight, argues that against this backdrop, clients and their supply chains must find a way to move forward. “As things stand, any solutions that exist are being implemented on a discretionary basis, project-by-project, contract-by-contract,” observes Rawlinson. “But in the absence of a mandated industry-wide approach like the UK’s Site Operating Procedures introduced during the pandemic, the next best thing is a consistent approach for clients and their project teams to adopt.”

What might such an approach look like? Arcadis argues that it needs to focus on five key areas:

  • Supply chain resilience. Transparent relations with key suppliers are going to be vital if construction companies are to plan ahead – they need confidence about their suppliers’ ability to meet their requirements. In addition to urgent concerns around financial health and exposure to financial risk beyond the scope of a specific contract, supply chain resilience will increasingly involve navigating the impacts of sanctions, product sourcing and supply-chain disruption.
  • Project resilience. Identifying and mitigating showstopper risks is crucial to building project resilience - and these risks are multiplying as the impacts of the Ukraine crisis grow. Single points of failure are probably the greatest concern given the extent to which disruption to a complex system like a bathroom pod could trigger wider knock-on impacts.
  • Project optimisation. There has never been a more important time to focus on efficiency. Project optimisation should use the energy generated by the crisis to focus even more on opportunities to rationalise design, minimise waste and assure design completeness and quality. These are actions that project teams should always focus on, but the added value in the current market is significant.
  • Team culture. Collaboration and openness will prove invaluable in these market conditions. High performing teams can make a difference in the current crisis by collaborating to solve problems. Self-interest will potentially get in the way, and a project culture needs to be built to counter this. Getting the basics right around people care and commercial arrangements is the first step in getting this right.
  • Leadership and management. In such a turbulent marketplace, strong and consistent leadership matters more than ever. The Ukraine war provides ample demonstration of not only how important strong leadership is but how important it is to focus on the right issues.

There is no silver bullet to solve this crisis – in any case, introducing completely new ways of working would be a mistake. The scale of inflation and other problems facing construction companies is such that there are no easy answers. And uncertainty will continue to dominate; even if peace can be achieved in Ukraine, it will take some time for supply chains to return to stability.

Nevertheless, Arcadis’ Simon Rawlinson believes that clients and construction companies prepared to take this considered approach to their problems, adapting plans as new issues emerge or opportunities present themselves, will be in a far stronger position. “Great quality information will support better decisions, doing more with less will save money, and leveraging the problem-solving talent of teams will prepare projects for the challenges ahead, focusing effort on problems over which the project team has some control,” Rawlinson argues. “These are all well-established approaches that can be glued together by great relationships and strong leadership.”

Download your copy of the report from Arcadis’ website at https://bit.ly/3y8I6m6

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